Fuel subsidy could triple to Rp 40 trillion

Fuel subsidy could triple to Rp 40 trillion

Fitri Wulandari, The Jakarta Post, Jakarta

The government fuel subsidy this year may nearly triple to
around Rp 40 trillion (about US$4.35 billion) due to soaring oil
prices, the state oil and gas firm PT Pertamina said on Tuesday.

They also said it would worsen the state budget deficit and
had already put heavy pressure on Pertamina's cash flow.

The 2004 state budget has allocated some Rp 14.5 trillion for
fuel subsidies based on an average oil price assumption of $22
per barrel.

"Assuming crude oil prices stay at an average $35 per barrel,
fuel subsidies could reach a total of Rp 40 trillion," Pertamina
finance director Alfred Rohimone said in a hearing with the House
of Representatives Commission VIII on mining and energy.

The fuel subsidy will increase because the government has
decided not to raise fuel prices at home during the current
general election year, despite skyrocketing oil prices on the
international market. Even though the country is an oil
exporter, it also imports some of its crude oil needs.

In the past week, crude oil prices hit a 21-year high of $41
per barrel due to supply uncertainties amid political tension in
the Middle East.

On Tuesday, U.S. light sweet crude edged up 33 U.S. cents to
$41.39 per barrel while European North Sea Brent crude climbed to
$37.70 per barrel.

Anggito Abimanyu, the head of the fiscal analysis agency at
the Ministry of Finance said a one dollar increase (average for
the entire year) in the oil price would add a deficit to the
state budget of between Rp 700 billion and Rp 800 billion.

"That is, if other indices such as the exchange rate,
inflation and interest rates were unchanged," Anggito said. The
rupiah, however, has sharply declined in the past month, creating
inflationary pressures, and could eventually push the central
bank to raise interest rates.

But Anggito said that the government would work hard to ensure
that the 2004 deficit target of 1.2 percent of gross domestic
product (GDP) could be achieved. The current administration has
been commended for its success in trimming down budget deficits,
a key component to help create a healthy fiscal condition.

"We will make adjustments by issuing new policies," Anggito
said, but declined to elaborate.

The government is due to discuss a revision of the 2004 State
Budget with legislators next month.

Meanwhile, Pertamina said that the higher cost of importing
crude had put the company's cash flow at a "critical level" as
the government's subsidy funds were no longer sufficient.

Alfred said Pertamina's cash-on-hand is now less than Rp 2
trillion, but it must pay Rp 5.6 trillion a month to import crude
and fuel products.

The company imports some 300,000 barrels of crude and fuel
products a day at market prices but they are sold at a subsidized
price in line with government policy.

"The company is bleeding. It is urgent for the government to
help Pertamina," Alfred appealed.

He said that to make things worse, the government for years
had only covered around 70 percent of the fuel subsidy. "It
could take years to get full reimbursement from the government,"
he said.

He said that this condition would, among other things, force
the company to cancel several projects. He did not elaborate.

Elsewhere, Pertamina also announced that it had delayed a
planned sale of eurobonds until next year as rising bond yields
amid higher interest rate pressure would increase the borrowing
cost.The company has also halved the size of the eurobonds to
$250 million.